Each week, aprofessional investor tells us where he'd put his money. This week:Jacob de Tusch-Lec of the Artemis Global Income Fund.
Investors are growing more willing to recognise the fundamental attractions of stocks in Europe now that political storms have died down.We like three Italian telecoms and TV tower firms: INWIT (Milan: INW), Rai Way (Milan: RWAY) and EI Towers (Milan: EIT). These are essentially stable infrastructure assets with long-term contracts with telecom providers (such as Vodafone and Telecom Italia) as well as broadcasters such as RAI (Italy's state-owned broadcaster) and Silvio Berlusconi's Mediaset.
The towers businesses combine steady growth in earnings and predictable business models that hold up well through the economic cycle. They have low levels of debt (perhaps even too low for such stable businesses) and modest valuations. These holdings began to perform well as investors returned to Europe to buy mis-priced assets. On top of that, there are signs that the Italian broadcast and telecoms tower sector will gain blessing from regulators to consolidate, leading to strong synergies and cost savings. We think these are perfect holdings for an income fund. They yield is 4.5%-5% and we expect these dividends to grow.
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Another attractive stock is Western Digital (Nasdaq: WDC), which makes memory chips and hard disk drives (HDDs). This has been a top-five holding for us throughout the year and made the second-largest contribution to returns. Global demand for memory is accelerating as more devices are connected to the internet. A year ago, the market disliked three things about Western Digital. First, that its acquisition of SanDisk (a competitor) had increased its net-debt-to-equity ratio. Second, its exposure to NAND memory, a market where the competitive threat from Samsung meant that supply would increase. Third, its exposure to HDDs, which traditionally depended on demand from PC manufacturers a market in secular decline.
Our analysis focused on the acquisition of SanDisk and on what was lacking in the market's analysis of its HDD business. Rival Samsung has struggled to produce 3D NAND (the cutting-edge form of storage) and we were aware that it would not take much to throw the NAND market into shortage for a prolonged period of time, helping pricing. Furthermore, we felt demand was stronger than the market believed. We also identified an important change in the market for HDDs: data centres are now buying more of them to support streaming video. Using HDDs for that is more than eight times cheaper than NAND, and margins on sales to data farms are higher than realised. Western Digital trades on a price/earnings ratio of less than eight, and we think it makes products that will play an even more vital role ahead than they do today. While the dividend yield is currently only 2.3%, we believe that can grow over the long term.
